European sclerosis and a Chinese freebooter

I have just begun reading James Kynge's book, "China shakes the world". He takes as his starting-point the move of the enormous ThyssenKrupp steelworks from the German Ruhr to China in 2002. Lessons are leaping off the page immediately:

1. German steelworkers expected a 30-odd hour working week; the Chinese demolition team worked 12-hour shifts, seven days a week and unmade the factory in a third of the estimated time. The Chinese didn't use safety harnesses and looked like acrobats.

2. The political project of a united Germany had incurred costs that led to higher taxes, which slowed the economy at an already critical time, the late 90s.

3. The Germans were willing to sell the steel plant for its scrap value, because the market for that commodity was in a slump in 2000. But the Chinese man (Shen Wenrong) who bought it could see several things: the slump would eventually come to an end; the plant produced high-quality steel that emerging Chinese car factories would need; buying a second-hand factory meant he could get into production faster and more cheaply.

The writer points out that if the Germans had waited until 2004, the market in steel would have recovered so far that the plant would have been profitable again, in Dortmund, where iron had been made for nearly 200 years.

Doubtless Kynge intends us to see this as a symbolic example: a Europe more concerned with unification and workers' rights, than with global competitiveness; regulation and taxation hobbling the economy; stupid, short-sighted management. (This, by the way, is the Europe that my country seems determined to marry, sans pre-nuptial contract.)

Shen not only foresaw the resurgence of steel, but expects it to collapse again. In 2004 he said:

When the next crash in world steel prices comes, and it will certainly come in the next few years, a lot of our competitors who have bought expensive new equipment from abroad will go bust or be so weighed down by debt that they will not be able to move. At that time you will see that this purchase was good.

Industry and thrift, as per Benjamin Franklin (or indeed any late eighteenth-century enterpreneur). And long-sighted strategy, without the benefit of an MBA. Shen has a tiny desk, takes information by word of mouth and on A4 paper (not plasma screens), and makes fast, one-man decisions all day.

Yet what he does, is no more than what our people once did here.

Post #100: Hang onto your kettle!

There's a heartening anecdote from the Depression, and an old (2002) article from ThisIsMoney repeats it. 2002, you may remember, was gloomy for investors, and the article looks back to 70 years earlier. Following the Wall Street Crash of 1929, the market took three years to hit bottom, and in 1932 investors were losing hope:

...In New York's patrician Union League Club, members amused themselves by wallpapering an entire room with now 'worthless' stock certificates.

...Bear markets usually end when people have given up all interest in the market. By the later 1930s, members of new York's Union League club were holding kettles to the wall to steam off their stock certificates. They had become valuable again.

Some would say that a bear market has already recommenced, but it's disguised by monetary inflation. The dollar and pound figures distract us from the loss of real value, and the world economy continues to be mismanaged while the temporary fixes hold. Financial history suggests we should prepare for crisis, but also for eventual recovery.

UPDATE:

ThisIsMoney seems to have got the first date wrong (it was March 1934), also the city (Chicago, not NY) and missed out a very vivid follow-up! See the contemporary Time article here.

Modern Portfolio Theory: what mix of assets should I have?

Many financial advice firms are now fans of Modern Portfolio Theory, which earned Dr Harold Markowitz the Nobel prize in Economics. Explanations can get highly mathematical - the one I've linked to here is a bit more layman-friendly.

But the underlying principle is quite understandable: you can achieve similar investment returns with less risk, by diversifying your assets.

Even within one asset class, such as shares, some items rise and fall together, others move in opposite directions, still others seem to have no particular relationship. If all your shares are in different banking companies, that is still a bet limited to one sector, so it's a relatively risky position in equities.

Risk reduction also means a mix of asset types. A cautious investor may think cash is best, but in effect that is betting on only one horse in the race. Adding some "risky" assets can reduce the risk of the overall portfolio. "Playing safe" is therefore not necessarily the safest way to play it.

A tip for financial googlers

Some may find this helpful: if you are Googling for recent information about people like Marc Faber and Peter Schiff, you'll find the main search page is wonderful, but its results are arranged in likely order of relevance, not date.

But Google News (two stops along the toolbar) will let you re-order for freshness. Google News tends to omit some things in the cyber universe (e.g. blogs), but it does include online newsfeeds and some comment sites.

Inflation special - and forecast for the dollar drop

Please read practically everything in today's edition of The Daily Reckoning Australia - excellent stuff about inflation and the migration of wealth, worth copying and pasting into a handy Word document for your re-reading. Tom Au expects the dollar to drop against major currencies by 20%.

The natural resources chorus

Doug Casey at "Financial Sense" today reviews asset classes and considers all of them over-valued, excepting natural resources. On Monday, The Mogambo Guru repeated his refrain of "gold, oil and silver", and in an old article of 2005 maintained that even though there may be fluctuations, gold will win against paper. A couple of weeks ago, Antal Fekete noted that physical gold was disappearing fast into private hoards, as it did before the fall of the Roman Empire. Today's Daily Mail article already cited re Diana Choyleva, quotes Julien Garran at Legal & General saying that the "infectious growth environment" of Russia and the Middle East "will, in due course, strain the world's resources and cause inflationary pressure to build."

So how should we bet? Can we beat the mathematics-trained investment gunslingers who are superglued to their computer screens and supported by their massive commercial databases? Perhaps we shouldn't try to get the timing perfect, and instead, work out what asset/s are likely to preserve the value of our savings in the medium to long term. But the answer may not be entirely conventional, in these interesting times.

Diana Choyleva warns of market turmoil, too

Diana Choyleva of Lombard Street Research is reported today warning of inflation and castigating the Bank of England for failing to raise interest rates earlier and faster. Well, actually she has been saying this for a while now, and some of our bears have been warning us for much longer. And this is still news-at-the-back, as though there is anyone in this country that does not stand to be affected!